Valuation Dashboard: Industrials - Update

Summary

4 key fundamental factors across industries in the Industrial sector.

A valuation status relative to history.

A reference for picking stocks in each industry.

This series provides a valuation dashboard using the GICS classification. Each sector is covered once a month. This issue covers Industrials. It aims at giving reference values for a top-down approach across industries. A list of stocks to consider is offered in the conclusion without detailed analysis.

Methodology

Click to enlarge

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

Industry valuation table on 4/6/2016

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Aerospace&Defense

17.94

18.02

0.44%

1.06

1.02

-3.92%

20.53

21.28

3.52%

8.61

9

-0.39

Building Products

25.54

20.14

-26.81%

1.19

0.64

-85.94%

25

22.38

-11.71%

12.53

6.07

6.46

Construction&Engineering

22.56

18.3

-23.28%

0.42

0.48

12.50%

17.84

19.81

9.94%

2.78

5.98

-3.2

Elec.Equipment

20.41

18.31

-11.47%

1.28

1.64

21.95%

22.73

21.88

-3.88%

-7.89

-3.3

-4.59

Ind. Conglomerates

57.12

20.45

-179.32%

2.69

1.3

-106.92%

41.23

29.98

-37.53%

3.01

12.12

-9.11

Machinery

18.5

18.25

-1.37%

1.07

0.9

-18.89%

25.32

21.81

-16.09%

8.41

8.72

-0.31

Trading Companies&Distri

14.43

17.14

15.81%

0.59

0.7

15.71%

12.13

25

51.48%

6.49

8.61

-2.12

Commercial Sces&Supplies

22.21

20.86

-6.47%

1.08

1.03

-4.85%

20.32

19.84

-2.42%

1.87

3.99

-2.12

Professional Services*

22.79

24.04

5.20%

1.39

1.22

-13.93%

19.9

17.43

-14.17%

5.2

3.09

2.11

AirFreight&Logistics

31.09

21.06

-47.63%

0.79

0.57

-38.60%

30.14

32.87

8.31%

14.16

11.12

3.04

Airlines

10.3

15.18

32.15%

1.05

0.41

-156.10%

13.97

12.37

-12.93%

35.07

3

32.07

Marine**

8.57

14.04

38.96%

0.49

1.41

65.25%

9.07

23.27

61.02%

-17.36

6.05

-23.41

Road&Rail

15.51

19.17

19.09%

1.12

0.86

-30.23%

47.37

36.17

-30.96%

16.79

9.43

7.36

Transport Infrastructure**

5

23.6

78.81%

0.99

1.19

16.81%

6

20.8

71.15%

-4.12

-3.22

-0.9

Click to enlarge

*Professional Services: Avg since 2008.

**Factors may vary a lot for some industries with a low number of stocks or a lot of outliers.

Valuation

The following charts give an idea of the current status of industries relative to their historical average. The higher the better.

Price/Earnings:

Price/Sales:

Price/Free Cash Flow:

Quality (ROE)

Relative Momentum

The next chart compares the price action of the SPDR Select Sector ETF ( XLI) with SPY (chart from freestockcharts.com).

Click to enlarge

Conclusion

Industrials have outperformed the broad market by about 2.5% in the last 3 months. The 5 S&P 500 industrial companies with the best momentum on this period are ADT Corp (NYSE:ADT) , C.H. Robinson Worldwide Inc. (NASDAQ:CHRW), Cummins Inc. (NYSE:CMI), Eaton Corp Plc (NYSE:ETN), Kansas City Southern (NYSE:KSU). CHRW is close to an all-time high.

Since last month, P/E has deteriorated for Conglomerates, so has P/FCF for Electric Equipment, Air Freight, Road/Rail, and ROE for Airlines. P/FCF has improved for Construction and Commercial services.

Trading Companies, Transport Infrastructure are the only industries with the 3 valuation ratios pointing to underpricing and a quality factor close to the baseline. Marine has also good valuation factors, but looks like a value trap because of a very bad ROE. Building Products look overpriced, and Machinery close to a fair value. The less attractive group is Conglomerates, with all factors worse than their historical averages.

There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. The next table shows a list of stocks in the Industrial sector. They are all cheaper than their respective industry for 3 valuation factors simultaneously: Price/Earnings, Price/Sales, Price/Free Cash Flow. Then they are selected for their higher Return on Equity.

This screen updated and rebalanced monthly has an annualized return about 13% and a drawdown about -71% for a 17-year backtest. The sector ETF XLI has an annualized return of 6.79% with a similar drawdown on the same period. Past performance, real or simulated, is not a guarantee of future return. This list may be considered an entry point for further due diligence, or as a portfolio after adding a few trading rules and market timing. This is not investment advice. Do your own research before buying.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.